The last month has been unlike anything I have experienced as a dividend investor. I primarily started investing in 2011 and 2012, well after the the market calmed down after the financial crisis. There have been blips since then (Oil prices collapsing in 2016, for example), but nothing close to the magnitude of what we are experiencing now. It is most important that we all remain healthy. But after that, my family and I are trying to make the right financial and investment decisions. Because after all, as we are unfortunately seeing, you cannot predict what tomorrow will bring. So today, I spent some time researching dividend growth stocks and built my April dividend stock watch list.
Bert’s April Dividend Stock Watch List
The news in the market was not particularly great this week. Coronavirus cases and deaths continue to rise and more states are either issued or extending their stay at home orders. Here in Ohio, our stay at home order was extended until May 1, for example. With that, more companies continue to announce spending cuts, furloughs, and unfortunately, layoffs to help combat the impact that this virus has had on our society. With that, unemployment filings and numbers continue to rise. The most dire projections show national unemployment at levels 10X greater than its recent, lowest point. This is all scary, shocking information. And I understand the nervousness and uncertainty that Lanny discussed in his April Dividend Stock Watch List.
My investing strategy has been enhanced over the last few months with the sudden change in the economic environment. While I went on a purchase spree in February, I have been much, much more conservative with my investment decisions since then. Right now, I am focusing on quality dividend growth companies that have demonstrated their ability to grow their dividend during various economic cycles (financial crisis, tech bubble, etc.). Think our Top 5 Foundation Dividend Stocks and my “Always Buy Stocks.” These lists were built to help identify the cream of the crop and exclusively include Dividend Aristocrats. This last month is a humble reminder of WHY we were selective when building these lists.
Our investment strategy will always start with the 3 metrics of our Dividend Stock Screener. That will never change. But this isn’t a normal economic environment. So we have to consider the changing facts and circumstances when selecting the stocks we are investing in. We have written several articles and created a few lists to help us build our watch lists. The articles include identifying Dividend Aristocrats with Low Debt (as high debt has caused several dividend cuts), industries that are built to perform well in a pandemic, and other watch lists.
We can only make the best investment decisions we can with the information that is available at that moment in time. With that in mind, here are the dividend growth stocks on my April Dividend Stock Watch List. For each of the companies below, I will run them through the Dividend Diplomats Dividend Stock Screener! For each company, I will use their 4/3/20 share price, the average annual forward EPS per Yahoo! Finance, and their annual dividend.
Dividend Stock #1 – Archer Daniels Midland (ADM)
First up on my list is a Dividend Aristocrat that was one of the stocks on the “Low Debt” stock screener I ran last month. Their stock price dipped below the $30 per share price at one point in March. Despite the fact they have climbed back from this low point, the company is on my radar for that reason. ADM serves a critical function in the global market, despite the slowdown. They are a major player in the food processing industry, and are diversified within that industry, and the ethanol industry. ADM dominates in this food sector and the best part is, the consumer rarely knows their products are a critical part of the food they consume daily. That’s why they are on the top of my watch list. Here are their metrics based on our Stock Screener.
P/E Ratio – 10.79 X – Assuming a share price of $34.65 and estimated earnings of $3.21 per share. This P/E ratio is well below the S&P 500. A huge check in my mind.
Dividend Payout Ratio – 44.8% – Their dividend payout ratio falls right in the sweet spot, in between 40% – 60%. This indicates that management isn’t paying too low, or too high, of a dividend. A nice balance for investors.
Dividend Yield and Dividend Growth History – 4.2%; 45 consecutive annual dividend increases – In terms of dividend history, ADM has increased their dividend for nearly half a century. What’s crazy is how high their dividend yield is right now, which is a testament to how low their stock price has fallen.
Dividend Stock #2- AT&T (T)
I think Lanny hit this one right out of the park in his dividend stock watch list. AT&T is a perfect candidate to be on a watch list due to their diversified income stream and the fact that many users will still be using their products and services during a quarantine. Cell phones, streaming services, and internet. Those are all essential products that we are using while in the comfort of our own homes. Thus, with prices trading well below $30 per share range, it is a no-brainer to consider adding to my position in the Dividend Aristocrat and one of our Top 5 Foundation Dividend Stocks.
P/E Ratio – 7.8X – Assuming a share price of $27.46 and estimated earnings of $3.54 per share. This, like ADM, is well below the S&P 500.
Dividend Payout Ratio – 58.7% – Using their forward earnings and their annual dividend of $2.08, the company’s dividend payout ratio passes this metric of our dividend stock screener.
Dividend Yield and Dividend Growth History – The company is a Dividend Aristocrat, so enough said right their. AT&T will never blow your socks off in terms of dividend growth rate. But man is the company consistent. You can count on their annual $.01 per share increase in their quarterly dividend like clockwork. Plus, their dividend yield of 7.6% is absolutely INSANE right now. Think of the DRIP potential right there!
Dividend Stock #3 – International Business Machines (IBM)
Last on this list is Big Blue. IBM made shockwaves with their Red Hat acquisition last year, as the company looks to find a catalysts for their slow revenue growth. What I like about IBM is that they are a major player in a sector that will benefit from the pandemic, the shift to working from home versus an office, and sudden equipment purchases that are needed to shift workforces to these mobile work environments (as many companies were not prepared for huge percentages of their workforce to work from home when this struck). By being a part of, and dominating, so many information technology sectors, IBM continues to flex their muscles.
IBM is an interesting choice here for me, given the fact that I have written about how I am focusing on companies with low debt. IBM does not fit this bill. However, one mitigating factor for me was the company’s large cash position. IBM is sitting on a lot of cash. The fear with large debt balances is that the company may run into a cash crunch and be forced to make a tough choice between paying debt holders or shareholders. In IBM’s case, with so much cash and the industry they operate in, I am less concerned about this compared to companies in the oil or retail sectors.
P/E Ratio – 8.3X – Assuming a share price of $106.34 and average earnings of $12.86. This is well below the S&P 500.
Dividend Payout Ratio – 50% – Again, like I mentioned earlier, this is right in that perfect sweet spot that Lanny and I love to see.
Dividend Yield and Dividend Growth History – While IBM is not a Dividend Aristocrat yet, they are on the verge of becoming one. Plus, they still managed to increase their dividend during the tech bubble. Based on their history and their current payout ratio, the company has a strong dividend growth rate. Plus, did I mention, IBM is set to increase their dividend this month? What’s crazy is that their current dividend yield is above 6%. What’s not to love here?
For each of these companies, I am not planning on making a home run purchase. Rather, over the last month, I am making very small, incremental purchases. Right now, I will average down when appropriate; however, since there is such volatility and the speed at which new information (good and bad) becomes available, I am not going to push my chips all in and make one or two large investment purchases. However, I would not be shocked to add a few shares of each of these companies over the next few weeks to continue marching my dividend income upward.
As I said earlier, lets focus on staying healthy and doing what needs to be done to help combat the coronavirus impact. Enjoy this extra time with your loved ones and use this slowdown of life as a chance to enjoy the little things. It has been an absolute pleasure seeing my daughter every day and I have grown to appreciate all of those little interactions that are too hard to describe and are too difficult to capture on camera. This, if anything, has made me that much more eager to reach financial freedom.
What stocks are on your watch list this month? Are you also investing in small doses? Or are you avoiding the market all together right now? Do you disagree with any of the 3 stocks on my listing?